Moody's Corp at JPMorgan Ultimate Services Investor Conference (Virtual) Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : So with that, Ray, let's kick it off and again, it's great to have you back at the conference. When I think about Moody's, I think most people are quite familiar with Moody's, the brand, the company because the rating -- because of the credit ratings business. But some people might be less familiar with everything the company has become under your administration, especially outside of ratings. So maybe before we jump into the Q&A further, you can just give a little bit of a brief overview of the product portfolio, how the company has evolved over the last bunch of years.

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : Perfect. So I guess that really begs the question. Now that we understand the company and how much it's changed, and how much opportunity there is out there, you had such an extraordinary run at the company. You've been through challenging regulatory times. Obviously, the great financial crisis, become a real information services powerhouse. So why leave now? What's the reasoning there?

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : Let us know. You'll let us know, but we agree. I mean, this succession has been very natural to Rob. And you mentioned becoming Nonexecutive Chairman. Did you consider becoming an Executive Chairman? I know you did that in the past. Was that considered?

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : Understood.

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : So with Rob being your right-hand man in many ways, in what ways would you describe your style, your strategies, your skills being similar to or perhaps more probably different from Rob? And how can you see that playing out in the company's next -- in the next 5 years?

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : Okay. Great. So maybe we'll start talking a little bit about the rating side. You talked about the evolution in the MA portfolio. We'll come back to that. But MIS, looking forward, what do you expect the industry to look like? What kind of changes do you think will happen to the industry and to Moody's role in the industry over the next 5 to 10 years, whether we're talking about industry structure, regulatory changes, competitive landscape? Where do you think things will be similar and different?

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : Great. So when we think about more near-term on the MIS side, I know you guys haven't guided yet to debt issuance for 2021. But most forecasts out there and, I guess, most logic would say that you're -- you're probably going to see some level of declines or certainly, moderation in the trends next year. So maybe help us think through what are some of the puts and takes where really, sources of potential upside to the forecast out there or maybe some variables that could actually end up dragging issuance down further than what people might even be envisioning?

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : Got it. Maybe moving back over to M&A -- to MA, I should say, as you start off Moody's Analytics. Obviously, you discussed the movements of private company data. And what you did mention also, another area of expansion has been commercial real estate data. ESG is an area, for sure, of increased focus. So what would you say maybe to some of those that I just mentioned? Maybe it's something else? What would you say are the most exciting areas of opportunity in the near-term for Moody's Analytics?

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : It's interesting you didn't mention ESG just because it's something -- it's so in vogue right now, and we're going to have an ESG integration panel later in the day. A representative of Moody's will be on it as well. And so I know it's important, but I guess, maybe just on a relative basis, some of these other areas are a little bit bigger or...

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : Understood. So maybe sticking on the topic of ESG. How do you see Moody's -- it's a pretty competitive, pretty crowded ESG rating research industry already, players like MSCI, Sustainalytics. So what will Moody's niche be as time goes on? And how do you really see yourselves differentiating in that crowded space?

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : I think we only have a few minutes left. We really touched on most important topics, including KYC, real estate. I can drill on those more, but maybe we'll take a step back and just discuss MA high level in terms of margins. MA margin profile is certainly a question that I'm sure you guys often get. I know I do get it from investors. Even after a couple of years in a row of strong margin expansion, the division's margins are still below average, I would say, for the info services sector. So firstly, maybe are there any structural reasons for MA margins to be a little bit lighter than people might expect below peers? And maybe you can just talk about the long-term profitability potential of that segment?

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : Maybe -- we have one last -- 1 minute. Just maybe a quick comment on the international strategy, recent moves in Malaysia, Argentina, Uruguay. How do you think about just international opportunities? And what are the kind of markets that you look for?

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : If we had more time, that would be our next conversation topic. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2020 / 7:05PM, MCO.N - Moody's Corp at JPMorgan Ultimate Services Investor Conference (Virtual)

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : Great. And I appreciate you bringing up China, something that completely slipped my mind to bring up. Thank you very much. I think we're at the top of the hour now. It's a perfect way to end. And again, I want to thank you for 15 great years, and looking -- congratulations and good luck in the next chapter of your career/life.

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : Take care. PRESENTATION

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : Okay. Terrific. Martin, why don't you kick it off next? Martin Jarzebowski Thanks for having me Judah. Martin Jarzebowski, Director of ESG and Responsible Investing for Federated Hermes. In that capacity, I lead the Responsible Investing office, which is in charge of ESG integration across all 30 global investment teams across all asset classes, equities, fixed income, money markets, privates, alternatives and also being able to integrate our active engagement and stewardship division. So we have over $600 billion in global assets under management and also $1.2 trillion in assets under stewardship.

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : Okay, great. And might I add that certainly, since your arrival along with your team, the ESG has definitely risen in terms of the consciousness of equity research here at JPMorgan. So appreciate the partnership. QUESTIONS AND ANSWERS

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : Okay, great. Martin, how do you see the market having changed over the past 5 years? And where do you see things going? Martin Jarzebowski Yes. I'll dovetail on what Hugo just elaborated on. And so if you go back historically, I think most people, especially in the U.S. markets, the associated ESG is this sort of all-encompassing acronym and label, but many people just assumed that it was very much exclusionary in nature, right? So most people were familiar with SRI or Socially Responsible Investing. Those are the early origins that have been around for decades. Then you're starting to see this transition towards other types of products being developed. So you'd see something that's a little bit more impact oriented. So instead of excluding particular sectors or industries, now you're seeking to generate a measurable environmental or social benefit. Then you're starting to also have this handoff into exactly what Hugo described as being a little bit more mainstream. So when you think of ESG integration, if they think of existing products that are now weaving environmental, social and governance considerations into the DNA of the investment process. It's starting to become a natural extension of that primary research that they're doing in order to mitigate risk. So where I think all of this is starting to head is that you're going to see, obviously, greater demand changing consumer preferences from all angles. There's certainly going to be more of a regulatory dimension that's not just occurring in other regions. That's also going to be coming over the pond, into the United States. And so you're going to see that convergence begin to occur, and people are going to start thinking about ESG also not just something that they're doing within a certain slice of their portfolio, meaning, right now I think most people default to ESG and they think about it as something associated with proxy voting and very equity or shareholder-centric. And I think that the demand, especially in the U.S. is now going to start to open up into the multiple asset classes. So the pendulum is going to naturally swing from just something that people associate with equities to all different asset classes, whether it's fixed income, credit, cash management, money markets, alternatives, hedge fund products, private equity, real estate, infrastructure, you name it. It's not going to be just a slice of everyone's portfolio. It's going to comprise holistically the entire portfolio for most consumers. And that's institutional investors, such as large pensions and endowments as well as high net worth retail investors as well.

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : It's great, well, that was really great. So I'm going to start off with a question for Hugo. How do you use the ESG scoring and rating services that are out there? There's many and I'm curious, I'm trying to understand how you use it from your -- in your role whether there's a market leader in your eyes. And really, generally, how important is it for a company to have a "good" ESG score, good ESG rating? Hugo Dubourg That's an excellent question because that's something that comes up every single time we discuss the ESG. Basically, it's an easy question to answer for us because as a sell-side research provider, we don't see any benefit to provide these ESG ratings to the buy side, which already have access to it. So basically, we don't use it as per se. What we do provide otherwise, is what we call ESG, too, which is our proprietary ESG scoring system, which was built by the JPMorgan quantitative team and which is based on for 1/3 on, let's say, standard ESG rating and 1/3 for the momentum of this rating and 1/3 of fast-moving data, which is [wet risk and Arabesque]. So basically, the angle of this product is to provide investors who are interested in a purely quantitative approach to alpha generation with ESG data as a product ready to use. Now on the other hand, let's say, on the more fundamental side, what's the benefit of an ESG rating? An important point is that most investors have a proprietary ESG rating. So basically, they will buy the data from different data providers, such as MSCI and Sustainalytics, which are generally accepted or seen as the 2 largest players, but also from different data providers, and there's been a lot of consolidation over the last few years, and Moody's has been part of it. Most recently, Deutsche B÷rse which has been taken over just this week, ISS [ACOM], which is a historical player. And so it's really important to envision the diversity of methodologies and also the diversity of use by investors of this different ESG rating. An interesting point that has already been raised by Martina is passive. On the passive side, there is an important, let's say, impact of ESG rating because ESG rating providers are directly using these ratings to build ETFs or passive products. And so to some extent, you do have some kind of a threshold REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2020 / 7:05PM, MCO.N - Moody's Corp at JPMorgan Ultimate Services Investor Conference (Virtual) in terms of ESG rating to which, for certain providers, to be included in this type of products. And it's an important point because if you look at the detail of the ESG investment flows in the U.S., passive investing is actually a significant part of the market. I think the latest Q3 Morningstar numbers were stating 80% of the total flows were into passive products in the U.S., so it's significant. Final point on the overall correlation between ESG and, let's say, performance, there's multiple studies that show that and each data providers, obviously, has its own studies because it's a specific methodology, but there, overall, a clear correlation between the ESG rating and the long-term performance of the firm. So that's, let's say, the investment case for using these ratings.

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : Makes a lot of sense. Martina, a question for you. We often just joined together these 3 letters. ESG, they just click together, but they're actually quite distinct, obviously. So how do you see the unique role of each one of these 3 components in the ecosystem? Martina Macpherson Very fair assumptions. I mean, absolutely, we started this discussion maybe around some of the fundamentals when and where management and governance are concerned. Also within, for instance, credit rating institutions, and that's obviously a G fundamental that runs across many of the current equity fundamental analysis points. In the ESG space, we started the journey on the E side, up and foremost with climate change mitigation and adaptation. Literally, the COVID context, but even before that, is slightly shifting this picture. And we just probably all saw the recent letters from Larry Fink at BlackRock, mandating for stakeholder capitalism. And this is no surprise. The business roundtable and other influential bodies and organizations over the last 18 months in particular, have started to shift from ultimately E to E plus S. I highlighted the trajectory is around sustainable bonds, where we see the shift within asset classes. In this case, green bonds or sustainable bonds with a large representation for the first time this year of social and sustainability bonds, but we are seeing that generally also when and where ESG criteria assessments, methodologies and ultimately, then decision-making is concerned. So the ever-increasing complex picture that we are looking at is now allowing us to move away from purely quantitative information around climate change, risk and data and to look into the more qualitative implications when and where S is concerned. And this is making the S dimension so complex because you could look at macro and macroeconomic and societal implications when you talk about S. You could talk about social externalities and the stakeholder management perspective when you talk about S and that ultimately could translate into multiple criteria when and where, for instance, human rights and labor rights are concerned, where human capital management and D&I practices sit and fit in, when you look at COVID in the context of health and safety, security and well-being or broadly as well, other areas, supply chain management oversight and/or community engagement and impact. So ultimately, one thing that is becoming clear, though, that you can look at these and you must look at the different pillars, E, S and G, but also identify areas of interconnectedness, especially where S and G are concerned, look at human governance. Virement, that's a convergence of the S and G pillar or pillars. And it's interesting, I highlighted the stakeholder capitalism work. There's also more work done by The World Economic Forum in this context. They actually came up earlier this year with SDGs, that's the sustainable development goals related to data and metrics. And they are actually focusing on people, prosperity and principles of governance. Again, the S and G dimensions as well as the planet. And just to highlight in that context very briefly, we also looked at bringing 2 of the 4 in the COVID context, the interconnectedness of S and G and SDG-related information. And we made this quite freely available at our end. You can look up our COVID-19 data set that tries to explain and express and assess when, how companies showcase an element of social resilience and future fitness. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2020 / 7:05PM, MCO.N - Moody's Corp at JPMorgan Ultimate Services Investor Conference (Virtual) And I think these are all starting points. We have seen that multiple providers are shifting their efforts from ultimately E, to E plus S and G. And I think more of these fundamentals will become better understood also with the developments at the policy end. You might have heard or seen that the EU's technical expert group is expanding its current taxonomy and it's just calling together a group of experts to actually establish a social taxonomy. And again, these type of developments will be fundamental game changers.

Question: Judah Efram Sokel - JPMorgan Chase & Co, Research Division - Analyst : Great. Got about 2 minutes. I want to try to sneak in a couple -- 2 more questions. So the first one is for Martin. Just in terms of ESG and the role of ESG in capital markets, it seems like IPOs are increasingly telling an ESG story these days that you sometimes find an ESG lens switching from risk mitigation to almost being a source of demand. I'm wondering what resonates the most in the buy side. Martin Jarzebowski Yes, absolutely. There's certainly a proliferation of the messaging around ESG for IPOs. You're seeing the same thing for SPACs. So broadly on a capital market standpoint, I would lump that also in with sustainability-linked or green bonds that Martina brought up earlier, right? There's a huge REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2020 / 7:05PM, MCO.N - Moody's Corp at JPMorgan Ultimate Services Investor Conference (Virtual) proliferation there. So what I think is very interesting is any one of these new issuances, let's just call it that, they -- to be -- to have an ESG component within the narrative, then they're certainly on trend. But from the buy-side's perspective, I find it very interesting when you see a sustainably-linked bond or a green bond or an IPO come out with a very, very strong ESG message. But then at the same time, you look at the dichotomy between that message and maybe how that entity is actually rated, right? So there's a very interesting development in the sense of you see these new green bond issuances, whereas the parent, the sponsor, the obligor of that new insurance actually has a very, very poor ESG rating. So you got to be able to think about this in a 2-step function. It's not just the security, it's not just the label or the acronym that someone is painting on it. You want to see the authenticity behind it. You have to really understand the entity and the issuer, what kind of ESG trajectory are they on? Are they thinking about what's relevant and material? Are they disclosing it? Do they have a structure in order to be able to measure all of this information and to manage it effectively? Those are the types of things that we look for when we're directly engaging with thousands of corporates around the world, all based around that kind of an ecosystem.